AUDITING PROBLEMS

Audit of Property, Plant & Equipment ASSIGNMENT

PROBLEM NO. 1
Payment for safety fence around construction
Richard Company commenced operations on July 1, 2013. During site 34,000
the following year, the company acquired a tract of land, Payment to construction contractor for
demolished the building on the land and built a new factory. factory building 2,400,000
Equipment was acquired for the factory and, in March 2014, the Payment for external driveways, parking bays
plant was ready to commence operation. and safety lighting 540,000
Payment for safety inspection on building 30,000
During this period, the following inflows and outflows occurred: Payment for equipment 640,000
Payment for freight and insurance costs on
While searching for a suitable block of land, delivery of equipment 56,000
Richard Company placed an option to buy Payment of installation costs on equipment 120,000
with three real estate agents at a cost of Payment for safety equipment surrounding
P1,000 each. One of these blocks of equipment 110,000
land was later acquired. Payment for removal of safety fence 20,000
Payment of option fees P 3,000 Payment for new fence surrounding the
Receipt of loan from bank 4,000,000 factory 80,000
Payment to settlement agent for title search Payment for advertisements in the local paper
stamp duties and settlement fees 100,000 about the forthcoming factory and
Payment of arrears in rates on building and its benefits to the local community 5,000
land 50,000 Payment for opening ceremony 60,000
Payment for land 1,000,000 Payments to adjust equipment to more efficient
Payment for demolition of current building operating levels subsequent to initial
on land 120,000 operation 33,000
Proceeds from sale of material from old
building 55,000 REQUIRED:
Payment to architect 230,000 Compute the cost of the following:
Payment to council for approval of building 1. Land
construction 120,000 2. Land Improvements
3. Building
4. Equipment

PROBLEM NO. 2

You were engaged in making your second annual examination of Charlyn Company. The Machinery and Accumulated Depreciation
accounts are shown below:

Machinery
01/01/14 Balance P 500,000 09/01/14 Sale of Machine No. 3 P 10,000
06/01/14 Machine No. 23 150,000 12/31/14 Balance 644,000
09/01/14 Dismantling of Machine No. 3 4,000
P 654,000 P 654,000
01/01/15 Balance P 644,000

Accumulated Depreciation
12/31/14 Balance P 344,400 01/01/14 Balance P 280,000
12/31/14 Depreciation 64,400
P 344,400 P 344,400
01/01/15 Balance P 344,400

Your examination disclosed the following information: e. Included in charges to Repairs and Maintenance account was
an invoice for installation of Machine No. 23, in the amount of
a. The following adjusted balances appeared on December 31, P35,000.
2013 working papers: Machinery P500,000; Accumulated
Depreciation P280,000. QUESTIONS:
b. The company has depreciated all items of machinery at 10% Based on the information presented above and the result of your
per annum. The oldest item owned is seven years old as of audit, answer the following:
December 31, 2014.
c. It is the companys policy to take full years depreciation in the 5. How much is the loss on the sale of Machine No. 3?
year of acquisition and none in the year of disposition. a. P 38,000
d. Machine No. 3, which was purchased on March 1, 2010, at a b. P 37,333
cost of P80,000, was sold on September 1, 2014 for P10,000 c. P 42,000
cash. d. P 0

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AUDITING PROBLEMS
Audit of Property, Plant & Equipment ASSIGNMENT

3. Machine 3 was traded in for Machine 6 at an allowance of

6. The adjusting entry to correct the entry made in recording sale P24,000; the difference was paid in cash and charged to
of Machine No. 3 will include a debit to Production Machine account.
a. Loss on sale of machinery P 42,000 4. Depreciation rate is recognized at 25% per annum.
b. Accumulated Depreciation P 32,000
c. Both a and b QUESTIONS:
d. No adjusting entry is necessary Based on the above and the result of your audit, answer the
following:
7. How much is the adjusted balance of the Machinery account 10. The adjusting entry to correct the entry made on the sale of
as of December 31, 2014? Machine 1 will include a
a. P 644,000 a. Debit to Accumulated Depreciation P176,250
b. P 296,500 b. Debit to Cash P6,000
c. P 605,000 c. Credit to Production Machine P180,000
d. P 609,000 d. Credit to Gain on Sale of Machine P5,250

8. How much is the total depreciation expense on machinery for 11. The adjusting entry to correct the entry made on the
2014? destruction of Machine 2 will include a
a. P 64,400 a. Debit to Accumulated Depreciation P120,000
b. P 60,500 b. Debit to Loss on Destruction of Machine P101,250
c. P 50,000 c. Credit to Production Machine P101,250
d. P 58,125 d. Credit to Cash P432,000

9. How much is the balance of the Accumulated Depreciation 12. The adjusting entry to correct the entry made on trade-in of
account as of December 31, 2014? Machine 3 will include a
a. P 308,500 a. Debit to Accumulated Depreciation P67,500
b. P 301,458 b. Debit to Loss on Exchange P58,500
c. P 344,000 c. Credit to Production Machine P67,500
d. P 340,500 d. Credit to Cash P192,000

13. The total depreciation for the year ended December 31, 2014
PROBLEM NO. 3 is
a. P 237,000
In the audit of the books of Queen Sheil Corporation for the year b. P 232,500
2014, the following items and information appeared in the c. P 233,250
Production Machine account of the client: d. P 236,250

Date Particulars Debit Credit 14. The carrying amount of production machine as of December
01/01 Balance Machine 1, 2, 31, 2014 is
3, and 4 at P180,000 a. P 1,024,500
each P 720,000 b. P 1,029,000
02/28 Machine 5 396,000 c. P 1,069,500
Machine 1 P 6,000 d. P 990,750
09/01 Machine 6 192,000
12/01 Machine 7 432,000 PROBLEM NO. 4

The Accumulated Depreciation account contained no entries for Chaide Companys property, plant, and equipment, accumulated
the year 2014. The balance on January 1, 2014 per your audit, depreciation, and amortization balances at December 31, 2013
was as follows: are:

Machine 1 P 168,750 Accumulated

Machine 2 78,750 Cost depreciation
Machine 3 67,500 Land P 275,000
Machine 4 45,000 Buildings 2,800,000 P 672,900
Machinery and equipment 1,380,000 367,500
Based on your further inquiry and verification, you noted the Automobile and trucks 210,000 114,326
following: Leasehold improvements 432,000 108,000
1. Machine 5 was purchased for cash; it replaced Machine 1, Totals P 5,097,000 P 1,262,726
which was sold on this date for P6,000.
2. Machine 2 was destroyed by the thickness of engine oil used Additional information on depreciation, amortization methods, and
leading to explosion on December 1, 2014. Machine 7 was to useful lives follows:
replace Machine 2.
Asset Depreciation Method Useful Life
Buildings 150% - declining bal. 25 years

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AUDITING PROBLEMS
Audit of Property, Plant & Equipment ASSIGNMENT

Machinery & Equipment Straight-Line 10 years

Automobile and trucks 150%-declining bal. 5 years 18. Carrying amount of automobiles and trucks
(all acquired after 2009) a. P 68,472
Leasehold improvements Straight-line b. P 59,472
c. P 61,722
Depreciation is computed to the nearest month. d. P 52,722

Salvage values of depreciable assets are immaterial except for
automobiles and trucks which have estimated salvage values
equal to 15% of cost.
Other additional information:
Chaide entered into a twelve-year operating lease starting
January 1, 2011. The leasehold improvements were
completed on December 31, 2010 and the facility was
occupied on January 1, 2011.
On January 6, 2014, Chaide completed its self-construction
of a building on its own land. Direct costs of construction were
P1,095,000. Construction of the building required 15,000
direct labor hours. Chaides construction department has an
overhead allocation system for outside jobs based on an
activity denominator of 100,000 direct labor hours, budgeted
fixed costs of P2,500,000, and budgeted variable costs of P27
per direct labor hour.
On July 1, 2014, machinery and equipment were purchased
at a total invoice cost of P325,000. Additional costs of
P23,000 to rectify damage on delivery and P18,000 for
concrete embedding of machinery were incurred. A wall had
to be demolished to enable a large machine to be moved into
the plant. The wall demolition cost P7,000, and rebuilding of
the wall cost P19,000.
On August 30, 2014, Chaide purchased a new automobile
costing P25,000.
On September 30, 2014, a truck with a cost of P48,000 and a
carrying amount of P30,000 on December 31, 2013 was sold
for P23,500.
On November 4, 2014, Chaide purchased a tract of land for
investment purposes for P700,000. Chaide thinks it might use
the land as a potential future building site.
On December 20, 2014, a machine with a cost of P17,000, a
carrying amount of P2,975 on date of disposition, and a
market value of P4,000 was sold to a corporate officer.
QUESTIONS:
Based on the above and the result of your audit, compute for the
following as of and for the year ended December 31, 2014:
15. Total depreciation
a. P 460,228
b. P 462,678
c. P 470,528
d. P 461,528
16. Carrying amount of buildings
a. P 3,409,474
b. P 3,761,974
c. P 3,028,774
d. P 3,381,274
19. Carrying amount of property, plant and equipment
a. P 5,637,371
b. P 5,608,771
c. P 5,615,521
d. P 5,590,821
PROBLEM NO. 5
The draft balance sheet of Mitzi Corporation as of December 31,
2014 reported the net property, plant and equipment at
P6,270,000. Details of the amount follow:
Land at cost P1,000,000
Building at cost P4,000,000
Less accumulated
depreciation at 12/31/13 ( 800,000) 3,200,000
Plant at cost 5,200,000
Less accumulated
depreciation at 12/31/13 ( 3,130,000) 2,070,000
P 6,270,000
The following matters are relevant
(a) The company policy for all depreciation is that a full years
charge is made in the year of acquisition or completion and
none in the year of disposal.
(b) Included in the sales revenue is P300,000 being the sales
proceeds of an item of plant that was sold on June 30, 2014.
The plant had originally cost P900,000 and had been
depreciated by P630,000 as of December 31, 2013. Other
than recording the proceeds in sales and cash, no other
accounting entries for the disposal of the plant have been
made. All plant is depreciated at 25% per annum on the
reducing balance basis.
(c) On September 30, 2014, the company completed the
construction of a new warehouse. The construction was
achieved using the companys own resources as follows:
Purchased materials P 150,000
Direct labor 800,000
Supervision 65,000
Design and planning costs 20,000
Included in the above figures are P10,000 for materials and
P25,000 for labor costs that were effectively lost due to the
foundations being too close to a neighboring property. All the
above costs are included in cost of sales. The building was
brought into immediate use upon completion and has an
estimated useful life of 20 years (straight-line depreciation).

17. Carrying amount of machinery and equipment (d) At the beginning of the current year, the company had an
a. P 1,197,375 open market basis valuation of its properties (excluding the
b. P 1,180,275 newly constructed warehouse). Land was valued at P1.2
c. P 1,243,925 million and the property at P4.8 million. The directors wish
d. P 1,222,075 these values to be incorporated into the financial statements.

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AUDITING PROBLEMS
Audit of Property, Plant & Equipment ASSIGNMENT

The properties had an estimated remaining life of 20 years at a. P 175,000

the date of the valuation (straight-line depreciation is used). b. P 114,800
The company makes a transfer to retained earnings in respect c. P 145,600
of the excess depreciation on revalued assets. d. P 187,600

(e) Depreciation for the year 2014 has not yet been accounted 26. The depletion included in cost of sales for the year ended
for in the draft financial statements. December 31, 2014 is
a. P 173,300
QUESTIONS: b. P 137,300
Based on the above and the result of your audit, answer the c. P 168,350
following: d. P 110,900

20. The carrying amount of the new warehouse as of December 27. The carrying amount of the natural resources as of December
31, 2014 is 31, 2014 is
a. P 1,000,000 a. P 290,200
b. P 869,250 b. P 259,400
c. P 950,000 c. P 317,400
d. P 987,500 d. P 217,400

21. The carrying amount of plant as of December 31, 2014 is

a. P 1,350,000
b. P 1,375,310
c. P 1,282,500
d. P 1,710,000

22. The total depreciation for the year ended December 31, 2014
is
a. P 736,250
b. P 735,750
c. P 380,000
d. P 740,000

23. The revaluation surplus as of December 31, 2014 is

a. P 1,720,000
b. P 1,710,000
c. P 1,800,000
d. P 960,000

PROBLEM NO. 6

On January 2, 2012, Calamba Company purchased land for

P450,000, from which it is estimated that 400,000 tons of ore could
be extracted. It estimates that it will cost P80,000 to restore the
land, after which it could be sold for P30,000.

During 2012, the company mined 80,000 tons and sold 50,000
tons. During 2013, the company mined P100,000 tons and sold
120,000 tons. At the beginning of 2014, the company spent an
additional P100,000, which increased the reserves by 60,000 tons.
In 2014, the company mined 140,000 tons and sold 130,000 tons.
The company uses a FIFO cost flow assumption.

QUESTIONS:
Based on the above and the result of your audit, answer the
following: (Round depletion rate to two decimal places)

24. The depletion for 2013 is

a. P 125,000
b. P 134,000
c. P 107,200
d. P 80,000

25. The depletion for 2014 is

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